Coffee & Compliance Regulatory Round-up

Week 14 - 2018

FCA Fines and Bans Former Trader, Guillaume Adolph

What’s New: Recent news headlines have been dominated by trader Guillaume Adolph. Nicknamed "Gollum" after the greedy character in The Lord of the Rings, the former derivatives trader has been banned from trading for his role in the Libor scandal. The Financial Conduct Authority determined that Adolph is "not a fit and proper person to perform any regulated financial activity." Among other actions, Adolph sent at least 20 communications with the intent to influence the people making the bank’s Swiss franc variant of Libor submissions in order to benefit his own trading positions between 2008 and 2010. This is in addition to over $9 billion in fines levied on banks for Libor misconduct.

What’s the Impact: Today, traders use multiple ways to communicate in order to conduct trades. It’s not uncommon for a trader to use voice, email, IM and chat during the course of handling a single order. Firms must be able to identify communications that involve possible fraudulent activity, and link those communications together to determine if market manipulation occurred. This highlights the need for holistic solutions that enable firms to conduct automated surveillance across communication channels.

How we can Help: Today, most firms are using manual communication surveillance processes. The end result is often very bulky, doesn’t provide a clear end, and leaves great potential for missed or non-related communications. NICE Actimize’s Communication Surveillance solution enables intelligent monitoring of conversations, so compliance officers can automatically identify potential fraudulent and collusive activity without the manual effort.

FINRA Fines Investment Firm $2 Million for Failing to Reasonably Supervise Email Communications

What’s New: The Financial Industry Regulatory Authority (FINRA) announced that it has fined a major financial services firm $2 million for failing to maintain reasonably designed supervisory systems and procedures for reviewing email communications. Following a nine-year review period, FINRA concluded that the firm’s email review system was flawed in significant respects, allowing millions of emails to evade meaningful review. This created the unreasonable risk that misconduct by firm personnel could go undetected.

What’s the Impact: To monitor email communications, the firm in question used combinations of words and phrases – otherwise known as a text-based "lexicon" – to flag emails for review. But it was determined this approach was not reasonably designed to detect certain potential misconduct. While it did reduce the number of "false positives" (e.g. the quantity of irrelevant emails that needed to be reviewed), it did little to actually ensure that problematic email communications involving potential misconduct were brought to light.

How we can Help: NICE Actimize’s Communication Surveillance solution provides automated monitoring, alerting and resolution of any system issues that may arise using advanced linguistics as opposed to simply text- based searches. Complex models, honed over the previous five years in major banks around the world, are contained within the solution to specifically target manipulative behavior. Additionally, firms can run manual queries in a live environment for testing new searches and modifications – thus minimizing false positives but still reviewing 100% of all communications to a suitable level.

Foreign Affiliates of Major Public Accounting Firms Charged in Improper Audits

What’s New: The Securities and Exchange Commission (SEC) has recently fined the foreign affiliates of three well known accounting firms for improper audits. Companies with registered securities in the United States must be audited by public accounting firms that are registered with the Public Company Accounting Oversight Board (PCAOB). This allows for uniformity and appropriate controls over the reported financials of US securities, regardless of where the principal place of business is located.

What’s the Impact: Auditing firms must be registered with PCAOB in order to audit firms with US-registered securities. Unregistered Public Accountants risk improper professional conduct penalties, and place the business subject to the audit at risk of securities violations under the Securities Exchange Act of 1934.

How we can Help: NICE Actimize customers can leverage the Enterprise Risk Case Management (RCM) platform to generate alerts when a non-PCAOB firm is engaged in auditing firms with US-registered securities trades. NICE Actimize’s ERCM solution provides full workflow management capabilities to handle alerts, review the auditors’ qualifications, and escalate the alert if needed. This protects the firm from unknowingly engaging an unlicensed Public Accounting entity to perform required audits, thereby potentially averting unnecessary penalties under US law.

CFTC Fines

What’s New: The CFTC issued fines totaling $46.5 million to three firms for spoofing the US Precious Metals Futures market on COMEX. Two major banks were fined $1.5 million for abuse from July 2011 to August 2014, and $15 million for abuse from January 2008 through December 2013. Another global bank received a $30 million penalty for abuse that occurred from February 2008 to December 2013.

At one bank, the CFTC identified traders who acted in collusion, while traders at two other banks acted on their own.

What’s the Impact: The case was brought by the CFTC Division of Enforcement’s Spoofing Task Force. The CFTC Head of Enforcement James McDonald stated: "Today’s enforcement action demonstrates that the Commission will aggressively pursue entities that manipulate and spoof in our markets."

How we can Help: NICE Actimize’s Markets Surveillance Spoofing model would have detected the abuse. Such abuse could have been curtailed immediately, potentially heading off any CFTC fines and reputational damage. Our holistic surveillance solution would have alerted the compliance analyst to the collusion activities of traders at Deutsche Bank.

Department of Justice Fine (DoJ)

What’s New: The Department of Justice (DoJ) recently issued a $100 million fine on a bank for abusive practices within the bank’s FX division. Two institutional clients who had signed NDAs were about to transact large block orders in the FX market via the bank.

Identified breaches included Front Running, Ramping the Market, Manipulating the FX and the misuse of confidential information.

What’s the Impact: The bank agreed to implement extensive remedial procedures including dedicating extensive resources to its systems and controls. The bank also updated it policies on order routing, benchmarks, sharing of confidential information, market abuse (Front Running), while also engaging outside firms to audit internal controls and improve trade, voice, and audio surveillance.

How we can Help: NICE Actimize›s Markets Surveillance models (Control Room, Front Running, Marking the Fix and Price Ramping), combined with our communication surveillance technology, could have detected the abuse and potentially saved the firm $100 million in fines.

Cost of Compliance

What’s New: JWG, a think tank focused on regulations, has released a white paper highlighting the scale and cost of recent regulations.

To digest the complete text on MiFID II’s rules, you’d have to read 30,000+ pages and 1.7 million paragraphs. The white paper also points out that it has cost the industry approximately €2.5 billion to implement MiFID II in the last few years. By comparison, Dodd-Frank’s rules consisted of 22,000 pages and the cost to the industry has been $36 billion since 2010.

Separate research published by The TRADE estimates that banks spent approximately $100 billion on regulatory compliance in 2016. Global advisory firm Duff and Phelps estimates that compliance costs are typically 4% of revenues, and will rise to 10% by 2021.

What’s the Impact: Compliance costs are already substantial and expected to rise even more in coming years. This will have a substantial impact on financial firms as they calculate compliance budgets.

How we can Help: NICE Actimize’s Holistic Surveillance suite of solutions will improve efficiency and reduce costs. Manual processes are no longer enough to effectively meet the demands of modern regulations.